How Not to Market Electric Cars

Anton Wahlman

Wednesday

Dec 21, 2011 at 12:01 AMDec 21, 2011 at 9:07 PM

EVs still have too many variables to appeal to consumers on a cost-saving basis.

NEW YORK (TheStreet) -- Let's say you are about to buy a new car. Let's further say one of your top criteria is fuel economy. Chances are the ever-present Toyota Prius is high up on your list. It's on its third generation and has been in the market for a decade. Customers love it. Millions have been sold.

How much will you be paying for gasoline if you buy a Toyota Prius?
Let's say you drive an American-average of 12,000 miles per year at the Prius efficiency of 50 MPG. Then you will consume 240 gallon per year. At $4 per gallon for gasoline, that's $960 per year.
Chevrolet Volt

In other words, when buying an electric car (including an extended-range electric car such as the Chevrolet Volt), the maximum you will save on an annual basis is $960. That is if you get all of your electricity for free, such as from the numerous free public charging stations or from your employer's facility, where you might be parking while you're on your job.

Of course, if you charge your electric car on your own dime, your savings decline rapidly. In an electric car about the size of a Toyota Prius, you travel approximately three miles per kW/h. That means that the 12,000 miles per year will take 4,000 kW/h.

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The average price for electricity in the U.S. today is 11 cents per kW/h.
In other words, at that price your annual electric car energy consumption would be $440.

Yes, I know that increasingly cheaper night-rates are becoming available in area after area across the country. So the savings may therefore end up being greater than ($960-$440), or $550 per year.

There are all sorts of further adjustment factors here, impacting the total life-time net present value economic equation, I of course understand. For starters, an electric car has far fewer moving parts and should therefore require a lot less maintenance: no belts, hoses, chains, fans, complicated transmission, gas tank, exhaust system, various fluids including oil, etc.

On the other hand, at some point down the line that battery will need to be replaced. Most electric car warranties tend to be at least eight years. At that time, or whenever further down the road, batteries will likely have fallen dramatically in price compared to today. Will the price at that point be closer to $1,000 or closer to $10,000? Who knows?

Yet other discrepancies will be in force: What will be the used-car value of that electric car three or eight years into the future? 10 years? It could be higher than an equivalent petroleum car. Or no higher at all.
Pricing Variables

Let's take a best-case scenario of saying that you save the entire $960 per year, and that's the rational long-time net for the life of the car. How much would you pay for this savings? Would you pay $10,000 more up-front? $5,000? More than $10,000?

I would argue that based strictly on economic criteria, most people would value a $960 a year savings to the tune of somewhere between $5,000 and $10,000, again with all the other caveats about a long list of other uncertain puts and takes.

Today, the Nissan LEAF starts at $35,000 whereas the Ford Focus Electric and the Chevrolet Volt start at $40,000. Add anywhere between $1,000-something to $5,000 to load them up with almost all available equipment, which differs greatly from car to car. Then subtract $7,500 Federal tax credit and state credits that could often be $1,500 to $5,000 depending on where you live.

As you can see, it gets a bit complicated, but basically the prices after tax for these pure electric or extended-range electric cars can be as low as around $23,000 . . . or as high as $36,000 depending on where you live and how you equip the car, assuming you have the ability to take advantage of any applicable tax credits. That $23,000 to $36,000 range is essentially what a Toyota Prius could cost you, if you look at the entire Prius price range from the base version to a fully loaded plug-in Prius that's got a small battery and can take you 15 miles on electric power if you drive carefully and don't accelerate too hard.

What does this mean for the pricing argument? Basically, an electric
(or extended-range electric car) will cost you about as much as a Prius up-front, and you will save less than $1,000 per year in a best-case scenario -- strictly comparing gasoline vs. electric consumption.

For various reasons, it appears that this argument is not yet biting very hard in the market. Perhaps it's that many people don't think they will be able to utilize the Federal and state tax incentives, often ranging from $7,500 to $12,500 combined. Others are concerned with the limited range of a Nissan LEAF or a Ford Focus Electric -- somewhere around 73 miles on average, with no back-up power source, unlike the Chevrolet Volt.

If and when will this change? Is it just a matter of consumer education? Is it just a matter of improving the range? Will the time it takes to charge a battery have to be reduced dramatically? Aside from the obvious hope that electric car prices in general will decline, all of these things will surely happen in due course over the next few years. It's the pattern of technology, although not exactly Moore's Law.

The Alternative Marketing Approach:

Money is important to a lot of people. That's why they buy cars that either cost as little as possible, or that consume as little fuel as possible. But then there are other people: They buy cars because they have some other luxury characteristic.

You can buy a perfectly excellent mid-size car for $20,000 car today.
Such a car, such as a Hyundai Elantra or VW Passat, will in many ways perform as well as a heavy premium luxury car did 20 years ago. Yet, many people are more than happy to pay $40,000, $80,000 or even much more for a car that also basically transports four to five people from point A to point B.

People have different motives for buying a premium car. For some,
it's an image and the exclusivity itself: The car may not be any better, but they just don't want to drive something you see repeatedly on every street corner.

For others, "premium" many mean something more tangible. Some people pay extra for a faster car. Others pay extra for a car that runs more silently, more smoothly. This is where marketing an electric car comes in.

An electric car does have some definable benefits over a petroleum combustion engine car. For example, it's silent. It vibrates less.
The power delivery is ultra-smooth. The initial torque and acceleration is more powerful. Sounds a bit like a Bentley or Rolls Royce, doesn't it?

That's where the key to electric car marketing resides: Market it as a premium car, competing with the pinnacles of luxury.

Who have figured this out? Fisker and Tesla. Fisker is selling a
premium sedan for $100,000 and up. Tesla is selling a premium sedan with more interior space for a range of $50,000 to $100,000. Of course, the
Tesla is a pure electric car, whereas the Fisker Karma is an electric car with range extender, in many ways similar to the Chevrolet Volt.
Bypass Cost Qualms

Once you start paying $50,000 up to $100,000 and above, the "economic
payback" arguments about whom I started this articles go far away for most people. At that point you're not really worrying about whether your car really costs $10,000 more than it otherwise would, and whether this justifies annual savings of $1,000 or whatever. You just want a car that's silent, doesn't vibrate, and has an ultra-smooth power delivery that puts a Rolls Royce to shame if at all possible.

And yes, all that instantly available torque and resulting acceleration doesn't hurt either.

Cheap electric cars will probably become popular, but it may take a few years to get there before the economic equation becomes clear and easy to calculate. In contrast, when it comes to premium cars in the $50,000 to $100,000 class and above, the characteristics for great all-electric sales success is likely there already.

Does this mean that Tesla and Fisker will be hugely successful as companies and as stocks? Not necessarily. A car and the company surrounding it are very complex entities, and fortunes can fall on the slightest little detail that goes wrong somewhere along the line.

That said, at least Tesla's operation appears very impressive and has got the marketing message right: It's about luxury performance, not payback for the gasoline savings. The return-on-investment argument is just hard to get across to the consumer at this stage.

Conclusion: If Tesla just manages to avoid that difficult-to-predict execution or other snafu pothole, I think it may become very successful in marketing its luxury cars over the next couple of years.

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